Nvidia’s (NASDAQ:NVDA) current 10-for-1 stock split has gained investor’s attention because it makes the Nvidia stock more accessible to small investors.
Overall, Nvidia’s performance has been awe-inspiring, with an 181.46% upside year-to-date. The company dominates the competition with an 80% market share for AI chips. Still, its stock price is at an all-time high again, which begs whether its valuation is sound.
Nvidia Stock Q1 Success
Nvidia experienced substantial growth across the year. The company’s current financial reports for the first quarter of fiscal 2025 show a significant increase in revenue to $26.04 billion, up 262% year over year.
The gross margin also improved to 78.4% from 64.6% in the same quarter last year. Nvidia’s earnings per share for the first quarter of fiscal 2025 were $6.12, which is 416% up YOY.
AI Might Be Overhyped
Nvidia’s financial success seems to justify the hype in its stock. However, this might not be the case when we consider the AI market as a whole. About $50 billion has been invested in Nvidia’s chips, but AI startups have only generated around $3 billion in sales.
The Wall Street Journal interviewed John Chambers, the CEO of Cisco Systems (NASDAQ:CSCO) during the dot-com bubble. He draws some parallels between Cisco then and Nvidia right now.
Both companies had a dominant market share in a large new market while benefiting from large investments from the industry before it was profitable. Cisco’s stock today trades at around $46, never recovering from its peak of $77 in 2000.
Competitive Risks Are Prevalent
Nvidia faces fierce competition in the semiconductor production industry, with the major two being Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD).
China’s development of its semiconductors could threaten Nvidia’s position internationally. China has long relied on foreign companies for semiconductors like Nvidia, but it plans to produce 70% of its domestic chip use by 2025.
Cheap Chinese chips could flood the international markets like its EVs, disrupting pricing for everyone in the industry.
Nvidia’s Valuation Is a Gamble
Even though Cisco’s stock price never recovered, that didn’t mean it wasn’t a good company. Today, it still has around 41% of the market share and generates over $12 billion a year in revenue.
Similarly, Nvidia doesn’t have to be a bad company for its stock to be overvalued and for investors to never make their money back for many years.
Analysts have an average price target of $124.14, below its current trading price as of writing. This shows that the market is doubting Nvidia as it continues to break all-time highs seriously.
The higher the stock price, the more investors will sell off to take home their profits.
It’s currently trading at a trailing Price-to-sales (P/E) ratio of 79.29x and a forward P/E of 52.08x, which accounts for the estimated earnings increase next year.
Even so, if we compile the trailing P/E ratio for all the stocks in the Magnificent 7 — a list of tech conglomerates that many already consider overvalued — we get an average P/E ratio of 48.31x. Many of these companies are poised to ride the AI wave but still at a much lower valuation.
Great Company, Lousy Stock
Nvidia’s stock price has done exceptionally well. It’s financials, no doubt, back that story.
However, great companies don’t necessarily mean outstanding stock. It took the Nasdaq-100 15 years to recover from the bubble despite many of those stocks being household names today.
The growth of the AI industry is legitimate, but Nvidia isn’t the only way you can invest in it.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.